Fed holds rates at record low, pledges to keep them there for extended period

The Associated Press ~ staff The News
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WASHINGTON - The U.S. Federal Reserve pledged Wednesday to hold interest rates at a record low to drive down double-digit unemployment and sustain the economic recovery.
The Fed noted that the American economy is growing, however slowly. And turning more upbeat, it pointed to a slowing pace of layoffs.
Still, Fed Chairman Ben Bernanke and his colleagues gave no signal that they're considering raising rates anytime soon. They noted that consumer spending remains sluggish, the job market weak, wage growth slight and credit tight. Companies are still wary of hiring, they said.
In Canada, the Bank of Canada is expected to keep rates stable until late next spring, but has warned that rates will likely rise down the road as the economy recovers and Canadian consumers need to be careful about expanding their mortgage and other household debts.
Against the bacdrop of a still weak American economy, the Fed kept its target range for its bank lending rate at zero to 0.25 per cent, where it's stood since last December. And it repeated its pledge, first made in March, to keep rates at "exceptionally low levels" for an "extended period."
In response, commercial banks' prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will remain about 3.25 per cent. That's its lowest point in decades.
Super-low interest rates are good for borrowers who can get a loan and are willing to take on more debt. But those same low rates hurt savers. They're especially hard on people living on fixed incomes who are earning measly returns on savings accounts and certificates of deposit.
Noting the stabilized financial markets, the Fed said it expects to wind down several emergency lending programs when they are set to expire next year. That seemed to strike a confident note that the Fed thinks it can gradually lift supports it provided at the height of the financial crisis.
The central bank made no major changes to a program, set to expire in March, to help further drive down mortgage rates.
The Fed in on track to buy a total of $1.25 trillion in mortgage securities from Fannie Mae and Freddie Mac by the end of March. It has bought $845 billion so far. It's also on pace to buy $175 billion in debt from those groups under the same deadline. So far, the Fed has bought nearly $156 billion.
Its efforts to lower mortgage rates are paying off. Rates on 30-year loans averaged 4.81 per cent, Freddie Mac reported last week. That's down from 5.47 per cent last year.
The Fed said it has leeway to hold rates at super-low level because it expects that inflation will remain "subdued for some time."
Fed policymakers repeated their belief that slack in the economy - meaning plants operating below capacity and the weak employment market - will keep inflation under wraps.
A government report out Wednesday showed that inflation is in check despite a burst in energy prices. Energy prices, however, are already in retreat.
Bernanke, who's seeking a second term as Fed chief, has made clear his No. 1 task is sustaining the recovery. Last week, he and other Fed officials signalled they are in no rush to start raising rates.
At the same time, Bernanke has sought to assure skeptical lawmakers and investors that when the time is right, he's prepared to sop up all the money. Some worry that the Fed's cheap-money policies will stoke inflation.
Some encouraging signs for the economy have emerged lately. The economy finally returned to growth in the third quarter, after four straight losing quarters. And all signs suggest it picked up speed in the current final quarter of this year.
The nation's unemployment rate dipped to 10 per cent in November, from 10.2 per cent in October. And layoffs have slowed. Employers cut just 11,000 jobs last month, the best showing since the recession started two years ago.
Still, the Fed predicts unemployment will remain high because companies won't ramp up hiring until they feel confident the recovery will last.
Consumers did show a greater appetite to spend in October and November. But high unemployment and hard-to-get credit are likely to restrain shoppers during the rest of the holiday season and into next year.

Organizations: U.S. Federal Reserve, Bank of Canada, Freddie Mac Fannie Mae

Geographic location: WASHINGTON, Canada

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